FinCEN doubles the banks’ crypto exposure
At the center of a keynote address at the 2020 ACAMS Las Vegas virtual conference, FinCEN Director Kenneth A. Blanco highlighted the long-standing confusion banks have over their exposure to cryptocurrencies and the steps they need to take to mitigate these risks. Director Blanco said that FinCEN continues to focus its efforts on a number of priority areas, including the virtual currency area, saying, “One issue that continues to emerge during these discussions concerns mitigating risk associated with emerging payment systems, including virtual currencies. To be clear, exchanges aren’t the only ones exposed to crypto risk. These risks don’t just apply to monetary service companies or virtual currency exchangers; Banks also need to think about their crypto exposure. These are areas that your reviewers and FinCEN will ask you about when assessing the effectiveness of your AML program. “
… .Banks also need to think about their crypto exposure. These are areas that your reviewers and FinCEN will ask you about when evaluating the effectiveness of your AML program.
While existing FinCEN regulations (FIN-2019-A003) clearly state that it is the responsibility of all financial institutions to identify and suspect suspicious activity related to the exploitation of virtual currencies by criminals and other malicious actors for money laundering, sanction evasion and other illegal funding purposes Many banks remained unclear how virtual currencies could affect their institutions. Requirements from FinCEN apply to all financial institutions, even if those financial institutions do not directly buy, sell, or hold virtual assets. However, research by CipherTrace has shown that many banks do not know how to properly identify and monitor virtual currency transactions.
Banks must therefore also ask themselves: “What basic controls do we have to identify customers? Do we have institutional or peer-to-peer customers in virtual currencies? How does our financial institution interact with new payment systems? Do we have the tools we need to identify and report potentially suspicious activity through our financial institution? ”All of these questions stem from risk reduction policies and procedures.
Extensive research by CipherTrace Labs in 2019 uncovered people running illicit crypto MSBs at 8 out of 10 U.S. retail banks. These illegal MSBs use their bank accounts as a channel for accepting cash payments in exchange for A cryptocurrency (or cryptocurrency) is a digital asset that … more to support illegal trading of fiat for crypto. They often do this through a simple ACH transfer, bank transfer, or cash deposit with a custodian.
Criminals register companies online with fictitious or stolen IDs to set up business units. They then create corporate bank accounts that can be used to fund investments or operate unlicensed money services businesses. Of course, they don’t report this crypto asset activity to the financial institution. Criminals and terrorists choose this technique because direct deposits and large amounts of money being debited and debited from commercial bank accounts – unlike personal accounts – are less likely to trigger fraud alerts or suspicious activity reports (SARs) in financial institutions.
In addition, numerous peer-to-peer (P2P) marketplaces are specifically designed to help people buy and sell Bitcoin is a digital currency (also called cryptocurrency) … more and other virtual currencies with cash deposits or discrete transfers. In order to hide their unregistered MSBs, Bitcoin buyers on these P2P marketplaces are told not to notify bank counters that they are making deposits to buy BTC, but rather to buy “digital services”. Similarly, when making wire transfers, customers wishing to buy Bitcoin are instructed not to mention Bitcoin in any communication. These P2P exchangers don’t want their banks to get wind of their underground money services businesses.
Aside from being unregistered, many of these P2P exchangers lack any type of AML program and perform little or none at all You know your customers or you know your customer’s guidelines (KYC) … more due diligence. This lack of controls creates enormous AML risks for banks and other financial institutions.
If banks do not think about these questions, this will become clear when the auditors visit.
FinCEN director Blanco makes it absolutely clear that banks must have controls in place to identify, monitor and report suspicious activity related to virtual asset related transactions. Some financial institutions have developed their own systems to try to identify cryptocurrency-related accounts. However, this approach leads to many false positives and overlooks significant, large amounts of cash flows that cannot be detected by a homemade name match. CipherTrace research has shown that a typical name-based system can completely miss up to 70% or more of crypto exchanges and up to 90% of actual transaction volume.
These tools often lack the intelligence (including risk assessments on crypto exchanges around the world) necessary to do anything but analysis. Forward-looking banks are starting to reduce their AML / CTF exposure by using specialized tools like CipherTrace Aramda, which are designed to identify risky virtual asset service providers and other compliance risks arising from crypto asset deals.
CipherTrace Armada: Cryptanalysis and Compliance for Financial Institutions
CipherTrace Armada enables financial institutions to identify customers who are transacting with CVCs and unregistered crypto MSBs who may be attempting to evade supervision and failing to implement appropriate AML controls. CipherTrace Armada integrates easily with existing AML compliance systems and enables financial institutions to monitor wire transfers, ACH and credit card transactions to identify customers involved in CVC transactions.
Read CipherTrace’s best practices for monitoring virtual currency-related transactions at your bank: https://ciphertrace.com/best-practices-for-banks-to-monitor-virtual-currency/
Read FinCEN’s full prepared notes: https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-virtually-acams-aml